Photo: Library Of Congress
The hot Fed Governor speech of last week was the one by Daniel K. Tarullo delivered at Columbia on Thursday.Because he talked about how it might be a good idea to have the Fed start buying more Mortgage-Backed Securities, it really got the QE3 chatter going in full steam.
It may have contributed to Friday’s stock market rally.
But there was another part of Tarullo’s speech that was just as interesting, if not necessarily as market moving, and that’s where he talked about the unemployment crisis, and what the cause of it is, and whether it’s just cyclically very weak, or representative of something much deeper, and thus structural.
Tarullo hits on several possible factors that may be causing some kind of permanent shift in labour matters, but there’s one theory for structural unemployment — that workers just don’t have the skills needed to be productive — that doesn’t actually hold much water.
These three paragraphs are very interesting on that front:
A second factor, the one most often cited in support of the structural unemployment hypothesis, is skills mismatch. While it is quite plausible that certain features of the current labour market reflect some skills mismatch contributing to a rise in structural unemployment during the recession, closer examination reveals that they explain less of this increase than might first appear.
One such labour market feature is the sharp reduction in employment in sectors related to the housing bubble, such as residential construction and some parts of financial services. The contention is that the skills of workers in these sectors do not readily transfer to other sectors, and thus they will have a particularly difficult time finding new jobs. But in every recession, certain industries and occupations are hit particularly hard, resulting in significant permanent job losses. Yet previous recessions do not seem to have been accompanied by notable increases in structural unemployment. Thus, those who believe the mismatch problem specifically created by the recession—as distinguished from more-secular trends—is either more prevalent or more persistent now than in the past would need to identify some additional source of rigidity that has further hampered labour market adjustment.
Some have also pointed to the high level of long-term unemployment as evidence that mismatch is a major factor keeping the unemployment rate high. The claim is that those without the skills sought by employers will take longer, on average, to find new employment. However, the data do not back this claim, at least to date. If high unemployment durations were the result of mismatch, the probability of finding a new job should have declined proportionately more for the long-term unemployed than for the recently unemployed. In fact, reemployment probabilities during the recession fell by similar amounts for all durations of unemployment and have edged up by similar increments in the recovery. Again, this pattern is more consistent with weak aggregate demand being the most important cause of high unemployment.
The bolded line above is hugely important, since it bets right at this idea that the U.S. has this growing permanently unemployable class that has no hope of ever re-entering the workforce due to their skills and situations being so far away from what’s needed by employers.
Unfortunately, in the footnotes to Tarullo’s speech he doesn’t offer a citation for this fact, so we had to go hunting, and found this post by Mike Konczal on the exact question about whether, in the Great Recession, it’s been harder than normal for the long-term unemployed to find work.
Anyway, the answer is that no, it’s not harder than normal for the long-term unemployed to find work. In fact, the opposite is true: It’s harder than normal for the short-term unemployed to find work.
Going based on this data from the BLS (.pdf), he put together some very intriguing charts, a couple of which we’ll post here.
This first one shows the distribution, at any given time, of people who become “unemployed-to-employed” based on how long they’ve been unemployed.
As you can see, at any given time, historically, the short-term unemployed have been more likely to find work than the long term unemployed, but…. it’s tilting, so that these days, more and more of the people who find jobs are coming from the ranks of the long-term unemployed.
Photo: Mike Konczal
Now granted, there’s a problem, which is that there are more long-term unemployed than there used to be, so that could explain their greater participation in the work force.
However, other ways of slicing the data point to similar conclusions.
Here’s another chart that just looks at any given cohort’s odds of finding a job at any given moment.
Photo: Mike Konczal
As you can see, things have gotten worse for everybody, but actually things have gotten way worse for the short-term unemployed (the top line) while only modestly worse for the long-term unemployed.
All this of course has hugely important implications.
Critics of government stimulus spit at the notion that mere “spending” just thrown out there by the government could possibly affect the deep, root causes for the labour market being so bad.
The idea is taking hold in elite circles that the U.S. has these gigantic labour problems that can’t be fixed.
Venture capitalist Fred Wilson recently wrote a post about how nobody could fix the jobs situation, keying off the news that the Postal Service planned tons more layoffs in the future. He wrote:
We are undergoing a big time technological revolution that is disrupting big industries and big companies all over the place. And many of these big companies (and societies) have in place huge entitlements that make it impossible to operate them profitably.
The US Postal Service story is not a unique situation. It is the situation. And we are going to be living with this situation for many years to come. We are crossing a huge chasm from an industrial society to an information society. And there is immense pain in that transformation. Obama can’t solve the problem nor can any of his opponents. Time will solve this problem as new industries get built, people learn new skills and new jobs, and we dismantle entitlement systems that are not sustainable.
That is what is going on. I’d love to hear Obama tell the country that. But I doubt he will. But someone should.
Yes, disruption is happening, and people are being put out of work due to new industries and competitors and all that, but the idea that it’s different this time — that this time the masses are unemployable — is not born out by the facts.
The fact of the matter is: there is a deep, root cause of unemployment. it’s not the skills shortage, it’s the impact of private sector debt, and the ongoing deleveraging cycle. Thus, more spending, to help ameliorate this problem is precisely what the doctor ordered.
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